October 16, 2013

A few days ago, I broached a question about "The Countermajoritarian Difficulty and Congressional Ethics". We seem to talk a good deal about congressional or political corruption, usually referring to elected officials taking bribes, commiting some kind of fraud such as failure to report taxes or gifts, committing sexual harassment on the job, or otherwise engaging in generally disapproved and personally reprehensible activity. Why, I asked, don't we treat politicians' failures to consider the public good as an equal or greater ethical failure?

Joe McCarthy was a lying publicity seeker who destroyed numerous individuals' lives to further his own megalomania and dogmatic views of right and wrong, come what may to the country that he was ostensibly serving. It was a witness's heartfelt question--do you feel no shame? --that ultimately expressed the deep emotional harm McCarthy's communist witch-hunt had created and played a role in bringing Congress to its senses and the anti-government activities investigations to an end.

Today, that groundswell of community disgust at the antics of a figure like McCarthy won't work with congresspeople like Michele Bachmann, Ted Cruz, Eric Cantor, Rand Paul and Ted Yoho (the Florida Republican House member who was a vet and who has naively suggested that the US can solve its debt payment problems by "sitting down with creditors" like he did in his veterinary clinic and who thinks it won't really do much harm to let the US government default if it means keeping a law that a few radical anarchists don't like from taking effect). They are apparently oblivious, because they are so arrogantly sure of their own dogmatic views, immune from facts, and inclined to ignore harm to individuals they don't agree with (the poor, the vulnerable, the sick) while grandstanding for their Tea Party/right-wing "base" and the dogmatic, anarcho-libertarian "principles" they claim to be living by.

Yet it seems we need an ethical guidestone for dealing with these kinds of shenanigans. Somebody in Congress needs to step to the plate and suggest a revamping of the rules to prevent dogmatic abuse of the legislative process with the intent to derail the government itself. This is, ultimately an ethical, moral and justice issue.

Yves Smith has been thinking about ethics, too, from the perspective of the role of ethics in economic theory. Like me, she is deeply suspicious of the exaggerated role of economic theorists in setting fiscal, economic, and tax policy and the way economic modelling pushes fairness considerations to the periphery. She raises some important questions for consideration, as do the many thoughtful comments on the post. See Ethics and Complex Systems, Naked Capitalism (Oct. 16, 2013).

The way economists frame and analyze questions make it well-nigh impossible to incorporate matters of ethics. ...[M]ainstream economics has fetishized the use of mathematics, and consideration of fairness aren’t easily integrated into reductivist models. Even the accepted heresies, like information asymmetry and principal-agent problems, show how markets can fail to deliver desirable outcomes but those sub-optimal results are usually characterized as inefficiencies, not as “unfair” or “bad”. ...

[M]ost economists have a clear point of view on what they think the measure of success of economic policies should be, whether it is narrow commercial terms (growth, GDP, interest rates) or broader social outcomes. But even economists who care about the latter (as in they care not just about the level of growth but also how resources are shared), often think of the problem in a combination of distributive and mechanistic terms.

The weakest form of the “greater social welfare” arguments think that the first consideration should be growth and if we have more growth, the distributive problems (who gets how much) are easier to solve. Some who argue more fiercely social welfare oriented policies sometimes do so from a vantage of human dignity, but more often, their arguments are efficiency-based. ...

So another way to think about this problem is that economists effectively put unfair economic outcomes in the same box as externalities like pollution. And just as companies often fight with the public at large over how much pollution is acceptable, so too is there debate over how much unfairness is tolerable. ...

I contend that this perspective is inadequate and in fact has done great harm. Over the course of my life, one of the side effects of the increased infiltration of economic-style thinking into more and more walks of life has been a decline in a sense of social responsibility among what passes for our elites. ...

June 09, 2013

I can't resist pointing readers to tax professor Jim Maule's excellent post chastising everybody--from those obviously slanted propaganda-tank tax gurus Chris Edwards (you all know him as the purported tax expert from the right-wing pseudo-libertarian Cato Institute, whose other associate, Dan Mitchell, makes similar ridiculous claims in touting the purported "Laffer Theory" about how tax cuts restore tax revenues--I should note that I debated Chris in the run-up to the 2012 elections on Herman Cain's ridiculous tax "plan") and Steve Malanga (you all know him as the purported tax expert from the right-wing Manhattan Institute) to generally reasonable Taxpayer Advocate Nina Olson--about their ridiculous claims of a tax code that runs to the tens of thousands of pages. See James Maule, Code-Size Ignorance Knows No Bounds, MauledAgain (June 5, 2013).

Many of those claims about a giganormous Code that is pressing down on taxpayers from the sheer weight of its pages stem from three facts: (i) that the CCH looseleaf service itself notes that the service (in 20-odd volumes, with extensive and often duplicative annotations to cases, private letter rulings, notices, and various legislative history and rev.proc and rev.rul. items as well as the actual current Code provisions and regulations promulgated thereunder) runs more than 70,000 pages; (ii) that it is very useful to propaganda tanks and others bent on painting a negative picture of IRS tax enforcement and collection and taxes in general to portray the rules as so complex and lengthy that no one in their right mind could think it appropriate; and (iii) people without those bad propaganda intentions frequently serve as shilling boom-boxes for those (false) claims, because they don't stop and think or do their own homework. So the claims are repeated, over and over, and --as psychologists have shown--once something is repeated often enough, it gets to be accepted as fact even by those who should know better.

What people need to know --besides the obvious one fact that Congress, not the IRS as often insinuated in those blogposts condemning the length of the "code", writes the tax laws--is that:

(1) the CCH tax service includes more extra "stuff" that tax practitioners find very useful to help interpret the actual statutory language and the regulations promulgated thereunder than actual Code and Regulations! The tax code itself is relatively short--you can read it quicker than most good novels. (Additionally, the regulations have a lot of specifics applicable to particular types of taxpayers and situations, but even they aren't tens of thousands of pages long. And the page counts also depend greatly on the size of print on the page, folks. Word counts are much more meaningful.)

(2) most of the complexity that actually exists in the Code affects only the 3 in 10 taxpayers who "itemize" their deductions on their tax returns--and then, mostly the ones in the very tip-top of the distribution--the 1 in 10,000 who have lots of complexity in doing that itemization; and

(3) most of that complexity is necessary to prevent abuses by those who can hire very expensive lawyers, accountants and banks to set up schemes to avoid (or even evade) taxes.

May 31, 2013

No time for lengthy commentary today, but worth calling attention to some noteworthy items.

(1) The CBO released a new report detailing the income groups that benefit most from the various tax expenditures in the internal revenue code. No surprise that it finds that those in the highest income brackets receive an enormous amount of (not-needed) money from these tax subsidies.

The wealthy enjoy tax breaks that have no relation to anything they produce but do relate to the fact that they are the primary owners of financial assets, such as the preferential rate for capital gains and the preferential rate for corporate dividends. They also benefit much much more from any tax break they get than others do, especially when it comes to the mortgage interest deduction, the charitable contribution deduction or the exclusion for interest on tax-exempt bonds. That's because they have more expensive homes, get bigger mortgages, have more financial assets that they can contribute to their pet projects for a FULL deduction of value (not just, as with most other property contributions, for their actual investment), and are about the only purchasers of tax-exempt bonds (the rates for which are generally set to attract the wealthiest buyers) and always itemize, whereas 70% of Americans just take the standard deduction.

This $2 trillion is an economic waste--for some, its just more money to "invest" in offshore bank accounts and tax scams; for others, it just feeds Wall Street's private equity funds and "private banks" with more cash for casino capitalism bets and takeover gambles. As John Kominitsky, a commenter on the blog, notes "This is the "capital" Wall Street sucks up to fuel their Speculation Casino of derivatives (CDO's) high-speed computer trading, outsized "executive bonuses", and tax dodging off-shore accounts." So the tax breaks for the wealthy (costly to ordinary Americans who have to make up the tax money needed) feeds the Wall Street casino capitalism monster (costly to ordinary Americans who lose their homes and livelihoods as Wall Street banks require bailouts and private equity firms make megaprofits off firing people).

(2) The New York Times is on a roll on tax issues, seemingly reading more deeply than it had been doing for a while. Today's editorial makes the valid point that there is no justification in today's economy for abolishing corporate taxes even if they were replaced with something else. See editorial, No replacement for corporate taxes: the system needs to be reformed, not abolished, New York Times (May 31, 2013).

The editorial calls the "tax cut crowd" out on one of the arguments I've lambasted here for years--the idea pushed by corporate lobbyists (and people like Tim Cook in his recent congressional testimony) that since there is a good deal of corporate tax avoidance, we should just cut corporate taxes way back or even eliminate the corporate tax altogether, since we'll "obviously" never get sophisticated companies to pay more.This is wacky. Rewarding tax avoidance by eliminating the broken corporate tax system altogether gets it backwards, as the Times notes. The editorial makes six important points.

the corporate share of taxes has steadily declined, while corporations' use of the good things that the nation provides--the "social and economic foundation on which corporate success is built"--continues apace.

Ending the corporate tax just rewards the wealthy even more (who own most of corporate stock) and results in heavier burdens on everybody else

And, I would add, everybody else will carry that burden either by paying a larger share of taxes paid or by suffering from reduction in government services of particular importance to them, such as lower funding for education, for aid to the poor, for research, etc. The wealthy can buy themsevles whatever they want, so are now more willing to let government shrivel.

3. cutting out corporate taxes means increasing the deficit

4. There's no justification for cutting out corporate taxes in order to replace that system with another one, like a value added tax. That implies that it is reasonable to favor publicly traded corporations with all the benefits of US government without any of the obligations to pay for that benefit.

This is particularly unreasonable given the Supremes' decision that corporations have a right to spend their money to influence election campaigns for real people, and the right-wing's attempt to make a scandal out of the IRS scrutiny of groups that use 501(c)(4) status to conduct politicking in order not to have to reveal their donors, frequently major corporate owners like the Koch brothers and MNEs like Exxon Mobil. The idea of eliminating corporate taxes and passing the burden to less able to pay individuals is just another piece of the corporatist, class warfare agenda.

5. It also doesn't make sense to scrap corporate taxes if we decide to get rid of the preferential rate for dividends. There is ample reason for raising the tax rate on capital investment income--it mostly goes to the wealthy, so the preferential rates for the wealthy exacerbates the growing inequality in this country, though, as the article notes, there is little political will even among Democrats to set the system aright. But even so, eliminating the capital gains preference doesn't support eliminating the corporate tax--corporations don't have to pay dividends and shareholders get to choose when to realize taxable gains. Getting rid of the corporate tax would exacerbate the problem of corporations and shareholders controlling tax revenues through personal decisions.

6. We do need to reform corporate taxes--to prevent the ability of MNEs like Apple, Google and GE to pay ridiculously low or no US corporate taxes. And that needs global cooperation. So in the meantime we should require country by country reporting of profits and taxes.

(3) This last item isn't a tax item, but it is something that is just about as pervasive as tax issues in our lives--the question of whether corporate giants should be allowed to "own" patents on living organisms, especially on self-replicating living organisms like seeds.

I think the Supreme Court's recent decision in the Monsanto case is wrong. The current policy represents corporatism gone viral: it leaves farmers dependent on the few chemical giants that own the original genetically modified seed and all seeds that plants that sprout from it make. It rips profits from farmers' hands and puts them in the hands of managers and shareholders of Monsanto and companies like it--a kind of class warfare by proxy. It leaves our agriculture, and our environment, at the mercy of a big corporation that has been steadily pushing us to overuse poisonous pesticides and herbicides that ruin our air, our water, and our land. Congress needs to act to undo this patent determination. See Kristina Hubbard, Monsanto's Growing Monopoly: what the Supreme Court got wrong: patents on self-replicating seed are unethical, dangerous and anti-competitive, Salon.com (May 30, 2013).

November 24, 2012

The US and other countries like Germany have been pressing the Swiss on their bank secrecy, which allows U.S. and other foreign citizens to establish bank accounts without the knowledge of the home country and thus hide assets and income from home-country taxation. The US passed laws (called by the acronym "FATCA") that require foreign banks to actively report information on US accountholders. The hope is that every country will recognize the harm done to tax systems by banking secrecy and join in imposing similar information-reporting requirements.

The Swiss, meanwhile, have been trying to circumvent universal adoption of such laws. See, e.g., Nicholas Shaxson, A scheme designed to net trillions from tax haves is being scuppered, Guardian.com (Nov. 22, 2012). Britain, Luxemburg and Austria are cited as being in the forefront of the scuttling movement: Britain, for example, has entered into a "Rubrik Agreement" with the Swiss.

The Swiss thought they had a deal with Germany. This would be a bilateral deal in which the Swiss agree to an upfront payment in lieu of any back taxes on the accounts and then agree to act as tax collector for the foreign government on the accounts, thus maintaining secret the identity of the foreign taxpayers.

Such an agreement is problematic for two reasons: (i) it requires the foreign government to trust the Swiss banks to pay the right amount over in taxes and (ii) it undermines the drive to eliminate offshore banking secrecy as a cover for tax evasion.

Transparency in international banking and taxation matters would require that banks provide information on accounts held by foreigners to the foreigners' home jurisdictions, without any account-specific or accountholder-specific request required. The reason for a more transparent rule is that otherwise the home jurisdiction has to have information it does not have (who has an account at a Swiss bank) before it can ask for the information it needs to ferret out who has such an account and may be engaging in tax evasion. The biggest cracks in banking secrecy have thus come from whistleblowers and opportunists who sell account-holder information to purchasing jurisdictions.

Friday, the Germans rejected--for now at least--a German-Swiss deal supported by Chancellor Merkel that had been two years in the making. France is apparently also considering rethinking a similar deal.

The Swiss leverage was clearly stated by Swiss banking official Mario Tuor, who "noted that without a deal, the status quo would remain: German officials can seek specific information from the Swiss government on people suspected of tax evasion, or go back to buying data stolen from Swiss banks. 'With an agreement, every German taxpayer in Switzerland would be taxed,' Mr. Tuor said." German Lawmakers Reject Swiss Tax Deal

This is an oldie but goodie, one worth reminding you of (or calling to your attention for the first time).

[The] minimum wage, in constant dollars, has had its ups and downs since 1970 but the overall trend indicated by the straight black line is down. The numbers show that the American economy puts less value on the entry level worker than it did in 1970. Why is that? Are minimum wage workers less intelligent now than they were forty years ago? Are they lazier?

Representative Steve King (R-IA) on the floor of the House of Representatives last year:

"Labor is a commodity just like corn or beans or oil or gold, and the value of it needs to be determined by the competition, supply and demand in the workplace."

***

Samuel Gompers, cigar maker-turned-labor organizer and founder of the American Federation of Labor in the early 20th Century, had a different business ethic related to labor and said this: “You cannot weigh the human soul in the same scales with a piece of pork.”

Labor advocates actually managed to insert a statement affirming the status of human labor in the 1914 Clayton Antitrust Act: “The labor of a human being is not a commodity or article of commerce.”

November 23, 2012

Over the last 30 years, wage growth has lagged behind productivity across the industrialized world, leading to a steep fall in wages, salaries and other employee benefits as a proportion of G.D.P.

Simultaneously, there has been a big rise in inequality as the benefits of economic growth have accrued to those at the top of the income scale, as well as a steady increase in corporate income and profits. These trends have gone hand-in-hand with a steady decline in business investment.

***

There is no doubting the need for reforms aimed at increasing competition and opening the way for the adoption of new technologies. But governments need to combine market-led reforms with measures aimed at preventing a further decline in labor’s share of the pie.

With households now highly indebted across the industrialized world, a sustained recovery in private consumption will require a rise in the share of national incomes accounted for by wages and salaries.

The op-ed goes on to suggest a number of actions that governments should take: redoubling efforts to ensure that students complete school, providing that executive compensation relates to performance rather than stock prices, making tax systems more redistributive (including increasing the tax burden on capital and reducing it on labor), ending their "obsession with 'competitiveness'" and instead "boosting domestic demand", and being more "skeptical" of business lobbying.

Discussion of the debt trajectory is focused on some sort of grand bargain. Even if one is achieved, there’s reason for pessimism: any bargain is likely to sidestep, or even enshrine, many of the root causes driving inefficiencies in our nation’s spending and taxes.

***

Instead of wide-ranging, politically motivated panels, we need narrowly targeted commissions, without sitting members of Congress, modeled on the successful Base Closure and Realignment Commissions of recent decades.

***

What we need ... is a set of narrowly targeted commissions, each with a clearly articulated task and the ability to require a no-amendments, up-or-down vote — and all without sitting members of Congress.

On MarketWatch, David Weidner's "writing on the wall" column for Nov. 2, 2010 comments on "Paying for Wall Street's Prosperity: Loophole could cost taxpayers $70 billion". What loophole? That "carried interest" provision that lets hedge fund and private equity managers get their compensation income with the tax benefits of capital gains rather than ordinary rates. This isn't chicken feed. There are lots of private equity deals, and private equity deals have a huge impact on ordinary Americans--for one thing, they frequently purchase by leveraging the company they buy, so that it has considerable debt the interest on which is deductible, lowering the company's tax bills, at the same time that they frequently "restructure" so that the successor company is likely to fire lots of employees, sell some assets, and then do an IPO a few years down the road to bring in cash to pay off the debt. And many of them will fail--including bankruptcies and going out of business. The benefit (deferral and capital gains preference) goes to the private equity firms that make fortunes out of the deal. The burden is--surprise, surprise--borne by the ordinary Joe who gets fired or sees his company driven to insolvency or at the least faces job insecurity during the time that the private equity firm is whipping his company into shape for selling at a profit. The burden is also borne by taxpayers generally and the kinds of public goods we would like to fund with tax money (from parks to disease research, from environmental enforcement to insider trading enforcement, from new roads to better cargo searches, etc.)--as Weidner notes, all those equity deals result in firms that pay less income tax per dollar of pretax income--about 14.2% less, in fact-- than their counterparts that haven't been taken over by private equity firms, because of the way the private equity firms profit by leveraging their purchase with the company's own cash flows.

So there's a pretty good argument that private equity firms are harmful to the economy, not helpful. They for sure don't create jobs (and often cause job loss). And there's prety good evidence that we create a tax break (by allowing the interest deduction for leverage used to allow private equity firms to buyout the company ) that isn't justified. And then there's that tax break for carried interest. Why are we giving so much to companies that give us back so little? Weidner's answer--they've got lobbyists. $51.5 million over the last four years spent on lobbying, compared to a mere 7.7 million from 2003 to 2006. Blackstone and KKR spent $3.78 million this year alone. Id. (And they've got the ability to contribute money even more targeted to electing the Congress they want, after Citizens United. $10.6 million for the midterms, through Oct. 25, Weidner reports, based on OpenSecrets.org. data.)

II. the "Increase Our Taxes" Blog

There's a blog I just discovered, titled "increaseourtaxes.com". Uneven items, but some worth looking at. For example, see the post on "Tax Cuts and the Well Off", which shows graphically (from the Tax Foundation) the impact of Obama's proposed changes--mainly in higher amounts of tax from those earning a million or more, or "California and the Politics of Taxes " (nov. 1, 2010), which notes the problems that occur when "voters want services but do not want to pay for them". IN conclusion, he shows how all efforts to avoid taxes devastastes society.

"This is what happens when you try to avoid paying taxes. Politicians, hemmed in by public opinion, look even slimier as they cut deals to balance a budget. Voters kick those politicians out but don’t change the rules of the game, so the new politicians look just like the old ones, just like in Animal Farm. Revenue is raised indirectly and inefficiently, distorting the economy, reducing overall income and tax revenue, and eventually requiring the government to furlough teachers and fire fighters and cut popular services. Refusing to pay more in taxes hastens the end of exactly what we want to pay taxes for."

September 16, 2010

Part of the rhetoric that has been circulating these days about the need to "starve the beast", even at local and state government levels, is a view that we are wasting money on overpaid public employees, especially their pension plans and health benefits. Spewed hatefully on the Washington Post's comment site I've seen statements that every problem can be solved by cutting taxes to 15% for everybody (or taxing only "uses") and then cutting public employees' benefit to nothing since they are overpaid. The anti-government venom is clearly irrational and not based on any understanding of how government works, what life would be like without those state employees, or how hard most public employees work for their lower pay. [Disclosure--I am a state employee with a decent pension plan and decent health benefits.]

Of course, it is true that many states have underfunded their pension plans for their public employees. But this does not mean that the employees are overpaid or the goals for the pension plan funding were too high. It merely means that states have done what many imprudent individuals do--spent the money on something else rather than set it aside to meet the obligations that the state committed to with respect to its employees.

The Economic Policy INstitute finds that public employees at the state and local level are undercompensated compared to their peers in private employment, including the promised benefits (which, of course, some may not receive because of the push by the right to cut public pensions).

My fellow tax professor Jim Maule hits on a topic that is dear to my heart--the staggering amount of misinformation about tax that is circulated in the blogosphere, newspapers, radio shows, and television "news" commentary. He suggests much of it is intentional misinformation that is disseminated in an atempt to fool people in supporting positions that they would not support if they were fully--and accurately--informed. Here's his final paragraphs:--I think the answer to the question of "who benefits" must be the people whose policies are furthered by the misinformation, and no one else.

It is easy to figure out why the purveyors of tax nonsense do so. Political gain means more than does truth, honesty, or integrity. It’s not stupidity or laziness on their part. They know the facts, and they consciously twist the information because the twisted material has positive value for their agenda whereas accurate information will wipe out any realistic chance for political success. It also is easy, for me, to determine why the dissemination of tax nonsense works. As I pointed out in Tax Education Is Not Just for Tax Professionals:

It’s obvious that too few Americans understand enough about tax law or finances. It’s also obvious that one of the reasons is that insufficient funds are provided to educate the nation’s children about these things as they move through its school systems. . . . . If the nation continues to resist paying for quality education of its children, it will soon become a nation of the ignorant.

Who benefits when the country is a nation of the ignorant? The answer to that question explains much more than what fits in a four-paragraph blog post.

Yves notes the problem that the Dodd-Frank bill doesn't do enough to head off another financial crisis (as I've said here before, banks remain too big to fail, banks are still permitted to own hedge funds and private equity funds, with some restrictions that don't amount to enough, and banks continue proprietary trading under the guise of customer preparation and derivatives transactions--well, naked credit default swaps are still possible). So we are hoping for an assist from Basel III, the revision of the internationally agreed regime for regulating banks.

But Basel III doesn't go far enough either. It's a weakling when a giant was needed, though the banks as usual will pile on with whining about how these new rules will cripple their profitability and hence restrict lending and hence doom the global economy. As Wolf (the criticizer of the Basel rules linked by Yves) notes, tripling the size of required capital reserves "sounds tough, but only if one fails to realise that tripling almost nothing does not give one very much." Besides the delays in our own bank reforms (years for the banks to speculate themselves into another crisis, the Basel III reforms won't be fully implemented for another decade, plenty of time for "another crisis or two."

Here's a great paragraph from Wulf (with highlighting by Yves).

We cannot assess the costs of regulation without recognising a few facts: first, both the economy and the financial system have just survived a near death experience; second, the costs of the crisis include millions of unemployed and tens of trillions of dollars in lost output, as the Bank of England’s Andy Haldane has argued; third, governments rescued the financial system by socialising its risks; finally, the financial industry is the only one with limitless access to the public purse and is, as a result, by far the most subsidised in the world.

You should read the full post to see what Yves does with the highlighted phrase, but here's a sample.

The usual narrative, “privatized gains and socialized losses” is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state supported.

***

So, the reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries.

April 22, 2010

Ezra Klein, Congress's Bipartisan Regard for Wall Street Money, Apr. 21, 2010, provides an eloquent statement about the problems of our current campaign finance laws: the rich are especially privileged, in that they can 1) donate to a candidate whose views they share in a way that can make a difference in that candidate's chances for election but also 2) donate to all candidates indiscriminately in a way that hedges their rights to access no matter which candidate wins. Poor constituents lose out doubly--they can afford only a pittance to help the candidates whose positions they believe most closely reflect their own, and they cannot begin to play on the "money for access" field.

So what if the access the rich are interested in is to talk about the tax laws? For an amount of up-front money, access may provide a long-term monetary benefit in the nature of a tax expenditure that is tailored to provide significant benefits to upper-bracket taxpayers. It may even be sold as a tax expenditure in the public interest--like the mortgage interest deduction, which is touted as a way to help ordinary Americans buy their own homes but which is especially beneficial for those with million-dollar home mortgages and high income tax brackets.

The rich thus have money, in part, because they have had extraordinary access and through that access have succeeded in getting Congress (and regulators) to pass wealth-friendly laws. Deregulation of swaps, for example, meant Paulson could short the toxic CDO specially created for it by Goldman and earn great wealth on a deal that might not have been allowed --or certainly would have been less likely with full transparency-- in a regulated market. The preferential rate for dividends meant that a wealthy person could earn twice the income from his stock that his secretary earned in wages yet pay not a penny more of income tax.

The power of money to buy access seems worrisome whenever it occurs, but perhaps particularly troubling if the access influences tax laws because of the underlying principle of sharing the burdens of the cost of government that is also corrupted.

So what can we do about this conundrum of the power of money to buy access? I suppose we can vote those who readily provide access to money out of office. But campaign financing pays for the information (and misinformation) that we receive, so it appears we voters will be likely to be misinformed more as the need to be informed rises. On a local level, perhaps public financing of campaigns is the answer. But on the federal level? It appears that only volunteer activism and the work of organizations intended to counter directly the influence of purchased access could have an effect.

Do readers agree that corruption of the process is especially worrisome for tax laws? Do you see any better ways to counter the corruption?

March 21, 2010

Freddie Mac announces that (as of September) it will no longer support mortgages that provide an interest-only period. That's a good move. As one of the small lenders quoted inthe article comments, these products make sense, if at all, only for wealthy borrowers who have ample ability to increase payments when the monthly amounts "jump" at the end of the interest-only period (sometimes as long as 10 years); but they were offered to many who don't fall into that category. Note that the article indicates that the three-month delinquency rate on these types of mortgages that it holds is 18%--more than double the rate for principal & interest mortgages. That is not surprising, since such mortgages EITHER are just a silly incentive for taking out a loan without starting to pay it back immediately--silly, because Americans don't need incentives for more leverage but rather incentives to start paying down their debt-- OR operate under demonstrably false hypotheses such as the assumption that home values will go up sufficiently to pay off the loan in a quick sale (where the borrower is just "flipping" the house) or that the borrower who can only afford the initial interest payment now will make more money later so that paying higher interest AND a portion of the principal will be feasible later. Either way, they are one of among many "financial innovations" of the last few decades that primarily serve only to line the pockets of mortgage lenders while creating more instability in the financial system.

Hmmm. Given my various warnings about the harms of speculation, you can probably guess that I find the hypothesis here unable to stand up to much scrutiny. The journalist obviously was looking for a catchy attention-getter--how to make a hero out of the current bad guy. So while the article gives a little lip service to the real problems with naked market speculation, most of the time it is spent mouthing the encomiums that speculators have created about speculators to describe themselves as an important part of a functioning market. Bunk, I fear.

Here's why. Schwartz notes that the role of speculators in the recent financial system crash is "hotly debated" on Wall Street and in academe. He quotes a lone academic on the way speculators tend to increase market volatility by inflating bubbles on the way up and deflating them on the way down. Then he spends the rest of the article quoting short sellers and other speculative traders on their views of why speculation is an overall good--in fact, even mentioning (with a caveat that it may go too far) Edward Chancellor's view that speculation is driven by utopian views of an equal society rather than by greed. Ha, if only.

So he quotes a shortseller who says that because short sellers do market research to decide what to short, their trades aren't gambles. That's a false distinction. Research or no, trades are gambles. Only the initial investment in equity or debt is productive, in that it goes into the busienss and provides capital to buy equipment or raw materials or hire productive employees--all of the trading after that is a gamble of one sort or another. Naked trading in derivatives, of course, is even more clearly speculative gambling that just hopes to cash in on a perceived trend direction by voting with or against it. (Contrast with flash trading, using clients' expected buy-sell positions to make a profit, which isn't a gamble at all since it is an unfair way to make money off the market procedures themselves--neither productive in supplying capital to businesses nor helpful to investors in supplying information about investment possibilities but really a kind of insider trading taking advantage of known positions.) Even researched positions are not sure things--and even positions that seem fundamentally sound because a fundamental flaw in a company has been found can go wrong because the company addresses the flaw in time to come out.

The journalist "buys" that researched trades aren't gambles, and moves from that to state as fact that speculative trading "helps reduce risk by taking on the other side of popular trades, resisting the herd mentality that creates bubbles in the first place." Well, the fact is that for every trade there is someone in the opposite position. Speculators are as likely to be on the wrong side as the right side, where right is defined as the side that most accurately reflects economic fundamentals. One of the problems with the 2008 crisis was that there were lots of trades all assuming that house values were going to keep going up and therefore mortgage securities were going to keep being paid off. But they were made with insurance, which left the insurers holding the bag. In the credit default swap casino, AIG was the big holder of the losing chips (and, without the bailout, many of AIG's counterparties would have held losing chips as well, with the loss being diffused among all of those who had not stopped to consider that the hedge was only as good as the party providing it).

As for that idea that speculators act out of a utopian view of societal equity rather than greed, I'm gonna have to pass on that. Greed certainly seems to be the primary motivator in most, in the financial assets world where money and status and power are inextricably intertwined. Sure, part of the lure of any "get rich quick" scheme is that it allows the lowliest participant to have some possibility of being as rich as the wealthiest royalty. But the system really operates quite adversely to that view. Most of the riches accrue to those who already have them, or the financial institutions that manage the trades and get rich off of both sides, going up and coming down.

Dodd's letter to attorney general Holder is worth noting. He asks Holder to investigate the use of repo transactions as an accounting gimmick to hide information. As you will recall, the March 11 report from the bankrtupcty examiner in the Lehmann case (available on BNA for those with a subscription at a link from 47 DTR K-3 Mar 10, 2010) revealed the financial firm's teetering financial state had been hidden through a series of repo transactions designed to make its leger look less vulnerable by removing bad assets.

Repo transactions are really financings, but they can sometimes be treated as "true sales" for accounting purposes. This is one of the places where accounting should adopt tax standards rather than vice versa (in fact, there are lots of them). Tax has long required an examination of economic substance, and repo transactions are treated as financings. But accounting allows minor deviations from standard financing terms to treat repo transactions as "true sales" that thus disguise the amount of leverage on a firm's books or the fact that particular assets--in this case, bad mortgage loans--remain on the books. It's time that accountants quit playing so many gimmicks and adopted an economic substance standard.

Okay, a little older (Feb 9), but worth a close read--Dan Shaviro's assessment of the Republican spending/tax agenda put forward by Paul Ryan: Paul Ryan's Shadow Budget for the House Republicans (with links to the CBO letter scoring it). Shaviro notes that the budget will (my unavoidable response in some places in parentheses):

reduce benefits for those born in 1956 or later (why? simple steps can ensure sustainability)

privatize social security (always a bad idea, particularly bad after the market collapse)

provide a minimum social security benefit (hey, a good idea for once from the GOP)

replace medicare with vouchers (YIPES--bad idea)

replace insurance exclusion with refundable credit (mixed reaction--depends on what else is done--why not just move to single payer and be done with it)

freeze government spending (YA GOTTA BE KIDDING--after the Republicans have had essential control for 40 years in which they have increased militarization out the kazoo???? just what spending is to be frozen??? quite likely not the stuff the elites benefit from and not the military-industrial complex)

change the tax code (mostly for the worse--same old, now proven not to be economic stimulating tax cuts for corporations, etc.)